On the Portfolio Effects of Non-Marketable Assets: Government Transfers and Human Capital Payments

Basically, the government collects revenues through taxes and redistributes the funds through various types of transfers. A typical investor derives a yield from his marketable securities on which he pays part in taxes. He also has a nonmarketable claim against his portion of the taxes which the government holds and will pay in transfer payments. An analysis was conducted to determine an investor's optimum portfolio strategy under these conditions.A relationship which defines this problem relates before and after tax cash flows, the tax rate, taxes paid, transfer payments to the investor, and wealth and risk preference factors. The analysis shows that investors will not change the composition of risk portfolios in response to government actions to redistribute income, and they will consume government transfers as quickly as possible. Analyses of human capital, specifically wage payments, are analogous to government transfers, with respect to portfolio effects.